This year, nearly 40 percent of all property owners reached their tax caps, meaning they are maxed out in how much they pay in property taxes.
For property owners, that means their tax bill cannot increase beyond the cap. So even if local governments spend more, they won’t pay more.
For local governments, it means they don’t collect as much in property taxes — for some that’s more than $3 million — to pay for services, salaries and equipment.
Indiana has had property tax caps in place for five years. The caps limit tax bills to a percentage of a property’s value: 1 percent for homes, 2 percent for rental homes and farmland and 3 percent for businesses.
In Johnson County, the number of property owners reaching the cap has gone up. In 2012, for example, about one-third of property owners had reached their tax caps. In general, more property owners will reach their caps if property values go down, meaning the cap amount is lower, or if government spending goes up, meaning tax bills would go up and reach that maximum.
Typically, most property owners who reach the cap are homeowners or rental property owners, said Larry DeBoer, Purdue University professor and property tax expert.
In Johnson County, nearly 29 percent of homeowners reached their tax caps last year, making us 11th in the state, according to DeBoer’s analysis. Counties in the top 10 include Hamilton, Hendricks, Marion and Boone counties, along with Porter, Elkhart and Allen counties.
Around the state, some counties have lost industrial businesses, but their tax rates have stayed the same, meaning that tax burden has shifted to homeowners, thus more will reach the cap, DeBoer said.
But in central Indiana, the main reason more homeowners reach their caps is because of higher valued homes, he said.
Homeowners get a deduction of $45,000 off the total value of their home, which reduces the total amount they are taxed on. But when the value of a home is higher, the bigger savings in tax bills comes from the caps. For example, the tax bill for a home valued at $200,000 is capped at $2,000 — regardless of the tax rate. Before tax caps, that homeowner could have paid as much as $3,233 in property taxes in the city of Franklin, for example.
Homeowners are more likely to reach the cap if they live in a city or town, which typically has a higher tax rate than an unincorporated area, such as the Center Grove area.
In general, homeowners who have a tax rate of $2 per $100 of assessed value, such as those in areas around Franklin, Trafalgar and near Clark-Pleasant schools, will reach their caps if their home is valued at $200,000. At a tax rate of $3 per $100 of assessed value, such as in Franklin and parts of Greenwood, a homeowner will reach the cap with a home valued at $100,000, DeBoer said.
When more property owners reach their caps, the local governments lose money.
For example, Franklin schools is losing about $2.6 million, or 15 percent of what it could collect in taxes. The city is losing about $2.4 million, or 20 percent, according to a state analysis.
Clark-Pleasant schools is losing the highest amount of money at $3.6 million, or 17 percent of what it could collect. And the town of Edinburgh is losing the highest percentage, with a loss of $544,000, or 30 percent.
For Franklin schools, the losses have fluctuated, reaching a high of $3.4 million in 2013. The state had projected 2015 would be similar, but the actual loss was less. And the total value of properties has gone up about 7 percent in the past two years, which also helped, said Jeff Mercer, Franklin schools executive director of finance.
In the past five years, Franklin schools’ losses have totaled $13 million, which has required the school district to use money in savings or that could be used to hire more teachers and pay current teachers more, Mercer said.
For schools, the issue is often debt, DeBoer said.
Debt to construct new buildings due to growth, such as Franklin Community High School or Clark-Pleasant Middle School, must be paid first, before schools can fund other services, such as transportation or building maintenance.
When both of those buildings were approved, tax caps hadn’t started. Now, if a school district got approval from the public to build a new building, the debt for the project would be collected in addition to other expenses, like busing and building maintenance. But that wasn’t the case before the tax caps were approved, so now schools have to find a way to pay millions in existing debt on a limited income.
In the years after the caps began, lawmakers had discussed proposals to end or modify them. But those discussions are not happening now. Instead, they are looking at other ways to bring in more income for local government services losing money to tax caps, such as an increased local income tax, DeBoer said.